Choosing an insurance company
There are three major factors to consider when choosing an insurance company to insure your contracting business.
The first factor is the financial strength of the company. Since insurance claims are paid out of the funds that an insurance company has available, you will want to choose a company that has enough money to pay for potential claims. If an insurance company does not have enough money to pay claims in the event of a disaster, it may fail. The last thing you want to happen after an accident is to find out the insurance company does not have money available to pay for your losses. An insurance contract is a promise to pay, and you want to ensure that the insurer can fulfill its promise.
An insurance contract is a promise to pay, and you want to ensure that the insurer can fulfill its promise.
Major rating agencies, including A.M. Best, Fitch, Moody’s, and Standard & Poor’s provide letter grades evaluating the financial strength of insurance companies. Generally, it is safest to choose from insurance companies with ‘A’ letter grades.
A second factor in choosing an insurer is pricing. Different companies have different models for pricing risks, and some specialize in insurance for contractors and can offer better rates. No insurer will have the cheapest rates all of the time, so it is worthwhile to shop around or work with an insurance broker to compare quotes.
A third factor in choosing an insurance company is its reputation for customer service. If you have to file a claim, make changes to your policy or billing address, or otherwise interact with the insurer, you will want an insurer with good customer service. Some insurance companies spend more than others on investments in technology and customer service. This can make a difference in your customer experience, especially when filing claims.
Direct writers, agents & brokers
You have several options when choosing where to purchase contractors insurance: brokers, agents, and direct writers.
- Direct writers are insurance companies that will sell you insurance directly, without the use of agents or brokers.
- Insurance agents are independent companies that represent insurers in the sale of insurance. Captive agents represent only a single insurance company. Independent agents can represent more than one insurance company and can help you shop around with different companies.
- Insurance brokers are independent companies that represent your business instead of representing the insurer. Brokers can also help you compare prices and policies from competing insurance companies.
Brokers and agents are paid by the insurance company through commissions for the insurance policies they sell. The commissions are a percentage of the premiums that you pay, and the brokers and agents are paid for every year that you renew your policy.
Usually, the price of the same insurance policy from the same insurance company will be the same whether you buy it through a broker, agent, or direct writer. However, in some cases, brokers will charge your company a fee, which they should disclose to you in advance.
Many insurance policies for contracting businesses last for one-year periods and need to be renewed every year. Other policy periods (such as every 6 months) also exist. At the time of policy renewal, the insurance company may raise or lower the price, or even decide not to renew the policy. If the insurance company decides to not renew, the law usually requires them to give your company advance notice.
Your company can usually cancel an insurance policy at any time, although advance notice (usually 30 or 60 days in advance) is required for most policies. The amount of required notice should be listed in your policy. If you have prepaid premiums for the policy period, the insurance company will refund you for the portion of the policy period that has not yet elapsed.
If you are late on paying your insurance premiums, you usually have a grace period, as specified in the policy, to make up the payments. If the grace period has passed, the insurance company can cancel the policy after giving you advance notice. The grace period can be as short as 24 hours or up to 30 days.
Limit of insurance
Insurance policies usually have a limit of insurance, which is the maximum amount that the insurance company will pay out for losses during the policy period. The limit of insurance can be negotiated between your company and the insurance company. Premiums increase as the limit of insurance increases.
On many commercial insurance policies for contractors, it is common to have a separate limit “per occurrence” as well as an “aggregate” limit. An “occurrence” is an accident or disaster specified in the policy that leads to a payout from the insurance company, while the “aggregate” is the total amount paid by the insurance company in a policy period. For example, if your policy has limits of $2 million per occurrence and $4 million per year, the maximum it will pay for a single disaster is $2 million. If you have multiple disasters during the policy period, the maximum it will pay is $4 million total for the year.
Questions to ask your insurance provider or agent/broker
What insurance coverage is required? Which coverages are optional?
Workers’ compensation insurance is usually required for most types of contracting businesses that have employees. Many clients also require their contractors to carry commercial general liability insurance. Commercial auto insurance is required if your business owns vehicles titled in the business name, or if you use personal vehicles for business use.
Property coverages are usually optional. If you have leased equipment or if you use equipment as collateral for a loan, the bank or lessor may require you to have property insurance for the equipment. If you have a mortgage on a property you own, the bank may also require property insurance. If you rent your building, your landlord may also require you to have property insurance for your the property your business owns.
How much coverage do I need?
The amount of insurance to buy is a business risk management decision. Factors that may influence the amount of insurance to buy include:
- Minimum requirements from clients or landlords
- Business revenue
- Number of employees
- Types of risk exposures in your line of business
- Company assets, profits, and cash flow
In addition to insurance, how can I manage my risks?
It’s very important for contractors to have an accident and injury prevention plan in place that identifies safety risks through inspections, maintenance, and training. Many insurance companies and brokers also offer free safety resources that can help increase safety for your employees and clients and reduce the risk of insurance claims. As a contractor, it’s important to take advantage of these resources to prevent accidents.
How does coverage apply to claims of poor workmanship?
Commercial general liability insurance does not cover the value of the work itself as a result of poor workmanship. However, if poor workmanship causes bodily injury or damage to the rest of the property, those damages would be covered. The value of the work can be covered by Contractors Errors & Omissions insurance.
For example, if you build a staircase for a client, and the steps are faulty, causing a client to trip and fall, commercial general liability insurance would cover the cost of the bodily injury from the fall, but it would not cover any damage to the staircase.
What are common exclusions to my liability insurance?
Commercial general liability policies have a number of exclusions that are specified in the insurance contract. The following events are commonly excluded from liability insurance for contractors:
- intentional acts
- lead paint
- subsidence (sinking of the ground)
If I want to add a different trade, will I be covered? If I normally do plumbing but I also want to do roofing, will I be covered?
If you want to add a different trade or change trades, be sure to notify your insurance provider or agent/broker. The coverage you receive is based upon the information that you provide to the insurance company when you apply for insurance. Each trade has different risks and insurance premiums, so if you fail to notify your provider, you may not have coverage for the new business activities until you update your policy.
Are my subcontractors covered?
Your subcontractors need to have their own commercial general liability and worker’s compensation insurance policies. If they do not have their own coverage, your business may be liable for any damages the subcontractor causes. If the subcontractor is not able to obtain their own insurance, you can add them as an ‘Additional Insured’ on your liability insurance policy and can add them to your workers’ compensation policy as well. However, adding them to your policy may increase your premiums.
How does insurance work if I plan to retire soon?
You may need to continue your insurance coverage even after you retire or close your business because you could still be sued for work that you completed prior to retiring. Consider this example: you install a client’s cabinets right before you retire, and they fail one year after retirement, causing damage to the client’s property. If you cancel your insurance policy at the time you retire, you won’t have coverage for the lawsuit for the cabinet failure because the failure happened after the policy was canceled. The event that triggers the insurance is not the installation of the cabinets, but rather the failure of the cabinets.
To provide protection for your business, you have two possible options. One option is to keep your commercial general liability insurance active for several years after you retire. If any property damage or bodily injury occurs after you retire, the active coverage will continue to cover your business for any damages. A second option is to purchase discontinued operations coverage. This coverage protects you for work that you’ve done before your retirement but does not cover any new work that you might do. Discontinued operations coverage may be offered by your current insurance company, or it is also available from other competing companies as well.